Morningstar Advisor - February/March 2011 - (Page 20)

10 Questions Accountable Investor Bob Olstein Chairman and chief investment officer of Olstein Capital Management and portfolio manager of Olstein All-Cap Value OFALX Interviewed Dec. 1. 1 What type of returns do you expect from stocks over the next few years? High single digits. 2 What would you tell investors who might be worried about budget deficits? I’d tell them that stocks have climbed a wall of worry for 42 years. The bigger the worry, the better the returns. The stock market is a discounting mechanism. Valuations based on free cash flow are as cheap as I’ve ever seen relative to U.S. Treasury bonds. 3 Do you buy the argument that large-cap, high-quality companies are the cheapest part of the market? I don’t know if they’re the cheapest, but they are the cheapest they’ve been since 1973–74. 4 Why do you rarely hold companies based outside the United States? I have enough trouble understanding U.S. accounting to worry about foreign accounting, currency problems, and government problems. 5 What’s your favorite accounting metric? The difference between reported earnings and free cash flow, because reported earnings are based on the accrual method of accounting, which requires a lot of assumptions on the behalf of management, and sometimes those assumptions are a little bit unrealistic. 6 Are accounting practices better or worse today than they were when you started looking at them in the 1970s? Accounting behavior is contra-cyclical to valuations. Right now, we have the highest quality of earnings that I have seen in my 42 years in the business. But stay tuned. As valuations climb, so does accounting chicanery. High valuations have to be justified. 7 What’s the first stock you ever bought? Varo. They made night-vision equipment for the military back in the Vietnam War days. I bought the stock at the wrong price. Their use of accounting trickery led me to emphasize quality of earnings. It was a great lesson. 8 What’s the biggest investing mistake you ever made? Donna Karan. It went public, and I missed something in the prospectus—which I am never supposed to do, but I guess I’m human. She was being paid a percentage of the sales into her private company as opposed to getting salary that was already deducted from the company’s earnings. It was not prominent, but I should have seen it. In essence, I overvalued the company. What made it the biggest mistake is that this was my field of expertise and I blew it. 9 Why did you start a mutual fund in the mid-1990s? I was running private money at Smith Barney, and I felt that there was no public vehicle that based its investing decisions solely on analyzing balance sheets and income statements and looking for hidden items that indicated a change in earnings power. I also wanted to make our successful discipline available to the small investor. 10 What qualities do you look for in an analyst? A paranoid disposition, a heavy accounting background, being capable of playing on a team, and intellectual curiosity. And a fifth thing: I subscribe to Ace Greenberg’s “poor, smart, and a deep desire to get rich.” 20 Morningstar Advisor February/March 2011

Table of Contents for the Digital Edition of Morningstar Advisor - February/March 2011

Morningstar Advisor - February/March 2011
Letter From the Editor
First, Do No Harm
Do You Use Active or Passive Investment Strategies?
Best of Both Worlds
How to Build an Index
Accountable Investor
Nice Guys Finish First
Four Picks for the Present
Investment Briefs
A New Guardrail Against Risk
Tech Loosens the Purse Strings (a Bit)
It’s More About Costs Than Active or Passive
Play Your Stars
In Between Active and Passive
Selling Beta as Alpha
The Weighting Game, and Other Puzzles of Indexing
Leaving the Nest
Redefining Credit Risk
Another Vote for Market-Based Credit-Risk Measures
Big Opportunities in Small-Cap Stocks
Benchmarks? What Benchmarks?
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
VA Sales Slide, but Assets on the Rise
Indexing’s Lunatic Fringe

Morningstar Advisor - February/March 2011